Over-the-counter trading

Understand the idea

The parties agree terms such as price, amount and maturity through the relevant dealer or trading system. Some instruments trade electronically, and applicable rules may require reporting or execution on particular platforms. For derivatives, a separate decision or requirement determines whether a central counterparty clears the contract. Execution, clearing and settlement are related stages with different functions.

An example

Imagine an importer negotiating a forward with a bank for precisely US$137,000 on a particular invoice date. Tailoring that amount and date illustrates an OTC contract. A standardised interest-rate swap can also be negotiated in an OTC market and then submitted for central clearing. The first description concerns how the trade was arranged; the second concerns how its continuing obligations are managed.

Sources

• ECB: Securities financing and OTC derivatives markets
• CFTC: Swaps-market regulation and clearing

In the news

ECB survey finds easier wholesale credit terms, with financing costs mixed